Radical changes for electricity utilities by Paul Budde

There is no doubt that the current business model of most electricity utilities around the world is under enormous pressure.

From many different directions – political, environmental and economical – the industry is under pressure and it has no choice but to change. This, of course, is far more easily said than done. Unlike the telecoms industry, which faced significant changes a few decades ago, there is no new product on its way for the electricity companies to tap into. The telcos developed mobile, broadband and ICT services, but it is much harder for the utilities to come up with replacement services.

While one obvious direction is to develop new businesses around renewable energy, micro-grids, smart street lights, EV, etc, the problem will be that once such models become successful the question will arise as to whether they should be delivered through the monopoly model of the utilities or through the market. We already see in some of the European countries that the regulator has stepped in on the request of other market parties and ruled that, for example, the operation of EV loading stations should be left to the market.

An option is to look at the utilities in a totally different way. If we look at the current business model it is hard to see the utilities surviving in their current form, and perhaps as early as the next decade serious structural industry failures will start to occur. Sure, the current models can be propped up through government regulations (eg, forced price increases for consumers), but this will be unpopular and unsustainable moving ahead. There is no doubt that the current value of the utilities for their shareholders is diminishing.

On the other hand, the utilities are well-positioned to build new energy companies along the lines mentioned above; but for regulatory reasons these new ventures will need to be developed separately from their monopoly business and, they will need different shareholding constructions.

However the overall total value of these new businesses could easily surpass the value of the dwindling incumbent business.

Both the social and economic benefits will be very significant as these new businesses will add new jobs; will save consumers money (energy efficiency); will be environmental friendly; and will be far more sustainable longer-term. This future energy model will also be a key driver for much broader innovation and will be a key infrastructure element for the emerging smart cities.